Singapore follows in the footsteps of London – which gained so-called RQFII status last week – and Hong Kong. The move, designed to promote use of the yuan and broaden the investor base in China’s markets, builds on other measures taken recently that aim to reduce Asia’s dependence on the U.S. dollar.

Earlier this month China signed a 100 billion yuan ($16.4 billion) swap deal with Indonesia. It has existing pacts with Australia, South Korea and a number of European countries.

South Korea this month signed currency-swap agreements with Indonesia, Malaysia and the United Arab Emirates worth around $20 billion. Officials say they’re considering more such deals, in addition to existing pacts with China and Japan.

Swap agreements – in which central banks pledge to provide each other with currency, usually on a short-term basis – often are enacted during periods of financial turmoil, but more recently have taken on a greater role in trade and diplomacy.

The arrangements are small compared to use of the dollar for international transactions, which accounted for foreign-exchange turnover of around $4.65 trillion a day, or 87% of the global total, according to triennial survey conducted by the Bank for International Settlements in April.

Still, the swap deals help insulate Asian currencies a bit from the whims of speculative investors, and make it more likely their movements will reflect trade needs or economic fundamentals. China and South Korea got off relatively lightly during the market turmoil this summer, but some of those they’ve signed swap deals with — such as Indonesia — were hit hard as investors fled emerging markets.

For China, the latest deals are part of efforts to boost international use of the yuan and move closer to a fully convertible currency and an open capital account.

More broadly, the deals aim to boost bilateral trade and reduce associated costs by allowing central banks to buy currencies from each other, making it easier for commercial banks to get hold of foreign exchange.

The Chinese and Korean governments “want to avoid dollar concentration and diversify their portfolio structure. They will continue these efforts,” Bank of Tokyo-Mitsubishi UFJ strategist Takahiro Sekido said.

At a meeting in Brunei earlier this month, Chinese Premier Li Keqiang told East Asian leaders it was imperative to strengthen the region’s financial safety arrangements by bolstering foreign exchange reserves and signing currency-swap deals. He also said China would work with other countries to look at using local currencies in East Asia’s crisis fund, the Chiang Mai Initiative.

In an interview ahead of the paper’s publication this month, Mr. Rhee told The Wall Street Journal that the Chiang Mai Initiative should consider diversifying its portfolio out of dollars to include yen and eventually yuan. But that can’t happen overnight, so greater use of Asian currencies for bilateral swaps, trade settlement and bond issuance are a good intermediate goal, he said.

Beijing began liberalizing the yuan in 2009 but capital flows into and out of China are still restricted, making it difficult for central banks to hold large quantities of reserves in yuan. Some Chinese officials have suggested opening the country’s capital account by 2020, though economists warn that moving too fast could lead to destabilizing outflows.

Some economists say that even the Japanese yen may not make an appropriate reserve currency.

Charles Adams, a visiting professor at the Lee Kuan Yew School of Public Policy in Singapore and former International Monetary Fund official, says Japan would need to further increase the liquidity and openness of its financial markets and improve policy transparency for the yen to be an effective reserve currency.

“Since Japan is doing a big monetary experiment, I can’t imagine people would want to hold yen until it’s all over,” he said, referring to Prime Minister Shinzo Abe’s economic policy, which includes aggressive bond-buying by the Bank of Japan, fiscal stimulus and structural reforms.

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